The Delaware Tax Loophole

Have you ever wondered why there are so many banks headquartered in the state of Delaware? This small state — where I happened to spend four years of my life while at college — is friendly to businesses. For a century, Delaware has boasted friendly tax codes and lax incorporation laws, inviting savvy business owners and international crime syndicates to the state, at least on paper. Half of all the publicly-traded companies in the United States have part of their businesses incorporated in Delaware, the home of tax-free shopping. And there’s nothing more American on this Independence Day as taking advantage of laws designed to reduce taxes.

All you need to form a corporation in Delaware is someone willing to be your company’s registered agent in the state, and there are certainly companies willing to play that role for a fee. That is how one street address in Wilmington, Delaware is the legal home for over 285,000 separate businesses.

The benefits of incorporating in Delaware sound like the state might be an offshore tax haven.

When you incorporate your business in Delaware, you do not need to list the corporate officers, owners, directors, or any other private individual’s name. When I incorporated my business in New Jersey as a Limited Liability Company (LLC), the business was inextricably linked with my name and my personal identity. Incorporating in Delaware adds a layer of anonymity, which is good for people who prefer to avoid the public eye. I suppose that category might include criminals, fraudsters, or other people who would prefer not to be linked with the type of the business they’re in.

Delaware offers a very business-friendly legal system. Business jurisdiction is handled by Delaware’s Court of Chancery. Litigation goes to a business-friendly judge, not a jury. Juries can have unpredictable outcomes, but a judge is mostly confined by legal precedent.

Incorporating in Delaware is cost-effective. Whether your business deals with just $1,000 in sales a month, whether your business earns $50 million a year in global profits, or whether your scheme launders $100,000 a week, the one-time fee to incorporate in Delaware is only $89. Keep in mind you’ll need to pay a company to be your registered agent in the state, however.

The tax code in Delaware is designed such that some income that would be taxable in other states is not taxable in Delaware.

The friendly business environment in Delaware is stealing business from other states. Pennsylvania and New Jersey are losing millions of dollars in tax revenue because companies that do business that benefits those states are headquartered elsewhere.

Just as the federal government has been making it more difficult for American businesses to take advantage of offshore tax havens like the Cayman Islands, there may come a time when Delaware is restricted from offering these types of benefits. Politicians in Washington have attempted several times to limit these benefits, but have been unsuccessful thus far. The benefits may be irrelevant to most business owners, particularly if the business never becomes a publicly-traded entity. Businesses that start small but begin to grow can always be re-incorporated in Delaware if the owners decide that Delaware’s benefits make financial sense for the company.

Would you be willing to incorporate your business in Delaware just to take advantage of the tax and legal benefits?

It is definitely something to consider. When I worked in a CPA firm I did notice that a lot of businesses were incorporated there. I think a bowling alley I worked for in Virginia was incorporated there as well. As long as it is legal I don’t see why businesses shouldn’t take advantage!

Yes, of course. The irony in the question is that the act of incorporating is done for legal benefit! I’m not so sure about the tax benefits. The politicians should not be looking at DE with an eye towards trying to restrict DE – they should be looking at their state and take action to make it more business friendly.

It sure seems the only way state politicians tend to look at these things is when there is big news related to the tax laws. When biggest company in the state decides to leave then every politician has a tax plan to bolster businesses until the next election. After that nobody seems to care.

I think the jest of this article leans a little too far on the tax issues. Even though Delaware may not tax companies as much as other states in terms of incorporation, any company doing business in other states pay those state’s taxes on income. Boeing is incorporated in Delaware but that doesn’t mean it avoids coorporate income taxes in Illinois (Corporate HQ), Washington (Commercial Avaition), Missouri (Military Avaition) and every other state it has plants or operation. I believe incorporation in Delaware offers more of an administrative and legal advantage than a tax advantage. Delaware was the place to incorporate long before taxes overcame tariffs as an income source for the government.

My LLC was formed here in NJ but that was mostly out of convenience. I suppose it could make sense to investigate incorporating in Delaware. But as states continue to struggle with their budgets and seek out new ways to find revenue, I wouldn’t be surprised to see them going after companies whose business is predominantly in-state but the business itself is registered out of state.

I grew up in South Jersey, and it was common for people to travel to Delaware to purchase big-ticket items and avoid sales tax. It wasn’t very far, maybe a 45-minute trip. My dad worked at the Chrysler plant for eight or nine years and later took his master’s degree at the University of Delaware, so it seemed like a suburb to us.
We pronounced it “Del-ware,” though.

I would absolutely incorporate my business if I were a business owner. I was watching the wall street journal report on CNBC last week and the democratic governor of delaware was interviewed about his state’s business friendly policies. And Delaware’s state unemployment is lower than the national average.

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